Since nobody owns Bitcoin, it is hard to shut down. With thousands of people creating Bitcoins in what are called mining operations, there is every incentive for people to get involved. Profit brings participation. The software running Bitcoin is open source. Everybody can see the code, comment on it, and verify that it is legitimate. Developers gather in several places online, but the main hub is: https://github.com/Bitcoin/Bitcoin
Compared to previous digital currencies, and standard currency, Bitcoin has several amazing advantages:
1. Anybody can get involved in mining Bitcoins or creating currency. This is almost like being a gold or silver miner. It costs money to get set-up mining Bitcoins, and it gets more difficult every day, like the real world of mining.
2. Every node in the Bitcoin network knows about all Bitcoin transactions and keeps the ledger of the currency. This transparency keeps the system honest. No one can spend the same Bitcoin twice because each Bitcoin is checked throughout the system.
3. Bitcoin availability is limited. Earlier we saw how the central banks around the world (i.e. JCB) can create trillions in national currency in an instant. Money creation at that level makes national currencies become worth less over time. Bitcoins get created at a steady and diminishing rate. This results in a currency that gets more valuable over time.
4. It is possible to operate completely anonymously with Bitcoin. This is getting harder and harder to accomplish. We cover this in detail later in the book. It is a good idea to get set-up as an anonymous user as soon as possible. The anonymous window will close - and soon. Do not worry about setting up a Bitcoin account tied to your identification. We can do that any time. We can also set up as many Bitcoin accounts or identities as we want.
While some other currencies, notably e-gold, offered some privacy, all the records could be tracked back to the e-gold website. Additionally, all the ID's of users stayed on the e-gold servers. They were eventually confiscated during the federal raid. Many of the records for supposedly private, anonymous parties were turned over willingly by e-gold. Short version: centralized currencies cannot guarantee privacy completely. Bitcoin makes a good attempt at this, by distributing all transactions without needing one clearinghouse or one central database.
5. Bitcoin has no counter-party risk. It is mathematically proven and backed. Counter-party risk comes from someone or something backing a currency or certificate.
Now, the dollar cannot be turned in to a U.S. bank for silver. The counter party for the value of the U.S. dollar is the U.S. government. Our government has broken it's own law and will not give the value defined by the dollar.
Bitcoin has no counter-party backing it. There is no risk of default on what a Bitcoin is worth. Almost all other digital currencies that are backed by gold or silver, have a significant counter-party risk.
6. We can store Bitcoins in our brain, by memorizing key codes that define our access to Bitcoins. Other currencies prevent this because there is a central clearing house. Even a correctly memorized code will not work if the central clearing house or controlling monetary authority denies access to the account. This denial of account status just happened in Cyprus, and even occurred with the U.S. bank holiday during the depression. As long as the Bitcoins check out as legitimate against the Bitcoin ledger, they are valuable for Bitcoin transactions. No one can stop the spending of them.
7. Bitcoin is robust and resilient, Software programmers apply words such as robust, resilient, error tolerant, and self-healing when referring to code or systems that are hard to break. Bitcoin can only be stopped for good by destroying all networks, computers, and exchanges. When and if that happens, no one will be worrying about Bitcoins; we'll be in much deeper trouble.
Spread out across the globe, across all computer networks, with a steady up trend in use, and proven code, Bitcoin has staying power. This chart from Blockchain.info shows the general up trend in Bitcoin transactions. Nearing 80,000 transactions per day currently; when it tops 100,000, there will be a sudden upsurge.
8. Bitcoin creates businesses, None of the other alternative currencies created sites with as much traffic as MtGox.com. Bitcoin has already surpassed every prior virtual or digital currency with its popularity and price increases. While e-gold grew to over 5 million accounts, the number of significant stores accepting it never grew over the 100 mark. Bitcoin already has a steadily increasing list of merchants that accept Bitcoin; one list of merchants working with Bitcoin is here: http://www.Bitcointrading.com/forum/spend-Bitcoins/online-stores-accepting-Bitcoins/
9. Bitcoin transactions are irreversible. Unlike credit cards, a buyer who transfers funds to a seller cannot reverse the transaction getting their money back. Once we send Bitcoins, they are now gone. Getting our Bitcoins back, or reversing our spending of them, requires the seller or receiver of the Bitcoins to start a new transaction for sending back the purchase amount.
While we might consider this bad news, it shares this characteristic with cash. When we hand over cash buying something, we cannot reverse the transaction. The receiver of the cash has to agree to return our money.
Irreversibility turns out to be a positive for buyers, though they may not recognize it. When businesses accept credit cards and payment forms such as Paypal, they have to add somewhere between 5%-15% to each price for return allowances and scams. This fee is on top of the 3%-5% that credit cards, Paypal, etc. charge for their service. Total punishment that most buyers do not consider, but nonetheless pay for: about 8%-20%.
Cash-like transactions - irreversible ones - can result in reduced prices (can, but not necessarily will).
For sellers, usually businesses accepting Bitcoin, this irreversibility property solves one of the biggest problems with credit cards and Paypal.
For buyers, sometimes the lack of reversing transactions may not be a good thing. Some creative entrepreneurs realized this buyer concern was an opportunity for an escrow service.
Here are a few Bitcoin escrow services:
btcrow.com
thrucoin.com
clearcoin.com
Escrow services hold funds until the buyer agrees that the seller delivered. There are also dispute settlement operations included, though not where a seller wants to get involved if at all possible.
Other digital currencies have offered irreversibility, though without the convenience of escrow services. If we send a Western Union payment, it is gone essentially. There are no integrated Western Union escrow services.
10. Bitcoin's entrenched user base with about four years of operational proof gives it market dominance. There are other digital currencies, such as Pecunix, PerfectMoney, Liberty Reserve, etc. that have been around longer. However, none of the competitors have the explosive user base, nor do they have the growth trend of Bitcoin.
Globally, there are about 900,000 searches per month on Google for Bitcoin. While the crash in April 2013 slowed search traffic, there are still well over 800,000 unique searches per month, with over 50,000 new mtgox.com accounts added per day at the peak. Mtgox is the biggest Bitcoin exchange and a good indicator of BTC popularity.
Compared to previous digital currencies, and standard currency, Bitcoin has several amazing advantages:
1. Anybody can get involved in mining Bitcoins or creating currency. This is almost like being a gold or silver miner. It costs money to get set-up mining Bitcoins, and it gets more difficult every day, like the real world of mining.
2. Every node in the Bitcoin network knows about all Bitcoin transactions and keeps the ledger of the currency. This transparency keeps the system honest. No one can spend the same Bitcoin twice because each Bitcoin is checked throughout the system.
3. Bitcoin availability is limited. Earlier we saw how the central banks around the world (i.e. JCB) can create trillions in national currency in an instant. Money creation at that level makes national currencies become worth less over time. Bitcoins get created at a steady and diminishing rate. This results in a currency that gets more valuable over time.
4. It is possible to operate completely anonymously with Bitcoin. This is getting harder and harder to accomplish. We cover this in detail later in the book. It is a good idea to get set-up as an anonymous user as soon as possible. The anonymous window will close - and soon. Do not worry about setting up a Bitcoin account tied to your identification. We can do that any time. We can also set up as many Bitcoin accounts or identities as we want.
While some other currencies, notably e-gold, offered some privacy, all the records could be tracked back to the e-gold website. Additionally, all the ID's of users stayed on the e-gold servers. They were eventually confiscated during the federal raid. Many of the records for supposedly private, anonymous parties were turned over willingly by e-gold. Short version: centralized currencies cannot guarantee privacy completely. Bitcoin makes a good attempt at this, by distributing all transactions without needing one clearinghouse or one central database.
5. Bitcoin has no counter-party risk. It is mathematically proven and backed. Counter-party risk comes from someone or something backing a currency or certificate.
The US dollar has the definition in the constitution of 24.057 grams or 371 4/16 grains of pure silver as set out by Secretary of the U.S. Treasury Alexander Hamilton in 1792.
Now, the dollar cannot be turned in to a U.S. bank for silver. The counter party for the value of the U.S. dollar is the U.S. government. Our government has broken it's own law and will not give the value defined by the dollar.
Bitcoin has no counter-party backing it. There is no risk of default on what a Bitcoin is worth. Almost all other digital currencies that are backed by gold or silver, have a significant counter-party risk.
6. We can store Bitcoins in our brain, by memorizing key codes that define our access to Bitcoins. Other currencies prevent this because there is a central clearing house. Even a correctly memorized code will not work if the central clearing house or controlling monetary authority denies access to the account. This denial of account status just happened in Cyprus, and even occurred with the U.S. bank holiday during the depression. As long as the Bitcoins check out as legitimate against the Bitcoin ledger, they are valuable for Bitcoin transactions. No one can stop the spending of them.
7. Bitcoin is robust and resilient, Software programmers apply words such as robust, resilient, error tolerant, and self-healing when referring to code or systems that are hard to break. Bitcoin can only be stopped for good by destroying all networks, computers, and exchanges. When and if that happens, no one will be worrying about Bitcoins; we'll be in much deeper trouble.
Spread out across the globe, across all computer networks, with a steady up trend in use, and proven code, Bitcoin has staying power. This chart from Blockchain.info shows the general up trend in Bitcoin transactions. Nearing 80,000 transactions per day currently; when it tops 100,000, there will be a sudden upsurge.
8. Bitcoin creates businesses, None of the other alternative currencies created sites with as much traffic as MtGox.com. Bitcoin has already surpassed every prior virtual or digital currency with its popularity and price increases. While e-gold grew to over 5 million accounts, the number of significant stores accepting it never grew over the 100 mark. Bitcoin already has a steadily increasing list of merchants that accept Bitcoin; one list of merchants working with Bitcoin is here: http://www.Bitcointrading.com/forum/spend-Bitcoins/online-stores-accepting-Bitcoins/
9. Bitcoin transactions are irreversible. Unlike credit cards, a buyer who transfers funds to a seller cannot reverse the transaction getting their money back. Once we send Bitcoins, they are now gone. Getting our Bitcoins back, or reversing our spending of them, requires the seller or receiver of the Bitcoins to start a new transaction for sending back the purchase amount.
While we might consider this bad news, it shares this characteristic with cash. When we hand over cash buying something, we cannot reverse the transaction. The receiver of the cash has to agree to return our money.
Irreversibility turns out to be a positive for buyers, though they may not recognize it. When businesses accept credit cards and payment forms such as Paypal, they have to add somewhere between 5%-15% to each price for return allowances and scams. This fee is on top of the 3%-5% that credit cards, Paypal, etc. charge for their service. Total punishment that most buyers do not consider, but nonetheless pay for: about 8%-20%.
Cash-like transactions - irreversible ones - can result in reduced prices (can, but not necessarily will).
For sellers, usually businesses accepting Bitcoin, this irreversibility property solves one of the biggest problems with credit cards and Paypal.
For buyers, sometimes the lack of reversing transactions may not be a good thing. Some creative entrepreneurs realized this buyer concern was an opportunity for an escrow service.
Here are a few Bitcoin escrow services:
btcrow.com
thrucoin.com
clearcoin.com
Escrow services hold funds until the buyer agrees that the seller delivered. There are also dispute settlement operations included, though not where a seller wants to get involved if at all possible.
Other digital currencies have offered irreversibility, though without the convenience of escrow services. If we send a Western Union payment, it is gone essentially. There are no integrated Western Union escrow services.
10. Bitcoin's entrenched user base with about four years of operational proof gives it market dominance. There are other digital currencies, such as Pecunix, PerfectMoney, Liberty Reserve, etc. that have been around longer. However, none of the competitors have the explosive user base, nor do they have the growth trend of Bitcoin.
Globally, there are about 900,000 searches per month on Google for Bitcoin. While the crash in April 2013 slowed search traffic, there are still well over 800,000 unique searches per month, with over 50,000 new mtgox.com accounts added per day at the peak. Mtgox is the biggest Bitcoin exchange and a good indicator of BTC popularity.
There are many other differences between Bitcoin and other digital currencies. Understanding these differences requires going into the intricacies of how Bitcoin operates.We will venture into more of a technical look at Bitcoin in the remaining chapters. When we learn how Bitcoins get created, spent, saved, and circulated it will give us the keys to creating our own wealth with Bitcoin.
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